The Connection Between IT and M&A
Everyone has heard the adage, “time is money,” and it is especially true in virtually every aspect of M&A. Acquiring a firm requires the buyer to invest its resources – focused energy, time, and money – to make the acquisition happen. During the acquisition process, things can move quickly, and the focus often remains on the purchase price and other financial considerations. In contrast, other “soft” issues, such as the seller’s IT systems and infrastructure, are put on the back burner until after closing. If “time is money,” arguably, “wasting time is wasting money.” Therefore, it is crucial to consider when and how to involve your IT function in the M&A process to minimize issues and reduce integration time.
Technology as a Priority
With every acquisition, there are certain areas that, after closing, buyers are able to realize cost savings. Typically, these involve administrative functions where there are opportunities to take advantage of economies of scale. However, when those expected cost savings are not met, it can harm the ability of an acquisition to achieve its desired return. Even worse is the failure to identify hidden costs during the evaluation stage that could cause a buyer to overpay for an acquisition. Technology is a critically important area within a firm and is often the largest hard asset on the books. So, it is no surprise that focusing on technology is crucial to avoid a gross miscalculation on the part of a buyer.
People are and should be the focus of every AEC acquisition, but focusing on people does not mean you ignore the asset side of the business. Technology is a vital aspect of how every AEC firm gets work done. Without technology, the people in the organization are not likely to be as productive as they can be.
Get Out of the Weeds
When it comes to technology and M&A, there is a tendency to get stuck in the weeds early by focusing on too many details and not gathering enough high-level information. Based on our experiences, it’s best to first understand what IT infrastructure is present and how it is managed. Does the target firm outsource its IT, or do they handle it in-house? If handled in-house, how large is the team? What software do they use for design, accounting, etc.?
With this knowledge plus financial information, the buyer can determine if the firm has adequately invested in its IT. Using this approach, a buyer may uncover that the seller is using antiquated systems that must be dealt with sooner rather than later or the seller is using software that limits employee productivity. Understanding where potential opportunities and land mines may be lurking will allow you to properly account for costs (or cost savings) when creating your offer.
An experienced IT manager can help scope out any necessary upgrade costs or potential cost savings for consideration in formulating an offer. If your IT function has limited experience with integration, it is best to find a consultant who has experience in an M&A environment. Whether you are working with internal or external expertise, the key is to involve them as early in the process as possible. That may mean having IT engaged before you even start to talk numbers with the seller, as no seller wants to have their offer reduced later in the process.
The Strategic Value of IT
When an acquisition process completes the LOI (Letter of Intent) stage and moves into due diligence, a certain amount of “check box” diligence must take place to ensure that the buyer does not purchase a firm with unacceptable risks. Often, acquirers fail to see the strategic value of IT. In these cases, technology is treated as something to be verified rather than incorporated into the integration plan. If the creation of an IT integration plan is deferred until after an acquisition, there is the risk that the integration process will be delayed and, ultimately, be more costly for the buyer.
Historically, most buyers purchase a firm only if they first ensure that they are in compliance with the law, have the necessary licenses and that the people they are dealing with are legally authorized to sell the firm. But in today’s environment, buyers must also consider any cyber risks as part of any M&A transaction.
As cybercrime continues to grow, buyers must know if the seller is using their software properly and has protected itself from cybercrime. You can plan for the appropriate IT involvement during due diligence if you receive high-level IT information before the LOI. In this phase, IT can simultaneously check to see if the seller is a technological “money pit” or one with unacceptable cyber risks. It will also allow the buyer to begin to plan their IT systems integration. A smooth transition ensures both firms can access their information when necessary, which is always advisable. I sometimes hear firms say they do not plan to integrate their technology; therefore, an extensive IT discussion isn’t required. However, even if an acquisition remains a separate brand, there are always opportunities to share software, data, and infrastructure costs. By uncovering these opportunities at the outset, you will realize cost savings earlier and drive the performance of the acquisition upward.
Communicate, Communicate, Communicate
People hate uncertainty, and being acquired by another firm can be a scary time for the seller’s employees. A sure way to start on the wrong foot is to be unprepared to answer questions. The first questions are almost always related to job security and benefits, and the next questions are usually centered around how the buyer will change how employees perform their jobs. You may not be able to answer every question asked but sharing how things will change, and the timeline on which they will change can help alleviate unneeded anxiety. In the absence of information, people often create scenarios in their minds that are much worse than reality. You should not assume that change will be ill-received, when in fact, you may bring welcome news regarding IT infrastructure, improving efficiencies, etc. Open and frequent communication helps focus on the positive aspects of a merger or acquisition and helps get people on board early.
When it comes to IT, it is never too early to understand what you are buying, especially before you share an offer. Once an offer is accepted, getting your IT staff or IT consultants involved in the due diligence early on will ensure you can create a successful plan moving forward.
Join SN’s upcoming webinar, The Critical Role of IT in M&A, for deeper insight into this topic, including how to define the role of IT during each stage of a merger or acquisition.